A significant number of rental applicants own their own businesses. Many of these applicants are highly-qualified and make great tenants. Landlords accustomed to verifying income solely from pay stubs may need to tweak their tenant screening process.
Here are some tips that make it simpler to verify self-employment income:
Preliminary Questions to Ask the Applicant
Before getting to the income verification, there are some preliminary questions to ask. For instance:
Prior Employment History
Ask the applicant about prior employment history. Is the person voluntarily self-employed or struggling to make money after a recent layoff or firing? How long has the person been self-employed? These questions are relevant in determining if the business is profitable — and if the applicant’s income is reliable. Someone who is still working out the kinks in their business model is more of a risk than someone who’s been at it for a year or more.
Nature of the Business
Is the business legal? Will it be conducted in the rental unit? Will that impact the landlord’s costs? Violate zoning, building or parking restrictions? Anger other tenants?
Does the Business Exist?
Look for a website, business Facebook page, phone number, or other indications that the business is real. Check out applicable business registries. Rather than trying to decipher the business codes, ask the applicant to provide documents such as a business licence or corporate registration, or have the applicant’s business attorney verify that the business is in good standing.
How to Verify Income
Applicants who are employees of their companies may have pay stubs or wage statements. If that is the case, it is easy to calculate income. Most scammers aren’t going to go through the trouble of setting themselves up on a payroll just to defraud creditors. But pay stubs alone won’t verify that the business will continue to run a profit. It may be necessary to require several months of consistent income — six months to a year — to verify that the business is profitable and the income is reliable.
Often self-employed individuals take draws or pass through the income from the business directly to a personal account. This self-employment income may come in at nontraditional intervals, and that can make it difficult for the applicant to provide an accurate monthly income figure. This is not necessarily a problem so long as annual income can be determined, and the applicant’s income is not running negative throughout the year — that’s a sign of bad budgeting or business losses.
Income can be verified with:
Tax returns. Monthly income can be calculated from the annual income reported (divide by 12). Tax returns tend to be the most accurate indicator of self-employment income because business costs are factored in, and most people don’t inflate their taxable income.
Bank records. Personal bank records are of some use in verifying income, especially if the deposits are consistent each month, but the main benefit of bank statements is to assess whether the applicant routinely experiences non-sufficient funds or daily balances that teeter near zero. This is particularly problematic if negative or low balances coincide with the beginning of the month because that increases the likelihood a rent cheque will bounce.
Credit report. If the self-employed applicant hasn’t been managing money responsibly, that is likely to negatively impact credit. For instance, late payments or running up credit card balances will be flagged, which may be a disqualifying factor.
While it may be necessary to collect information about a business when working with a self-employed individual, it’s generally best to avoid leasing a property in the business name. That can cause legal issues that complicate an eviction or monetary judgement should the individual skip out on the rent.
Avoid working with cash-only businesses. Typically, the only reasons people run cash-only businesses are to hide illegal income and cheat on taxes. Either way, you could wind up with a tenant who suddenly is unable to pay rent, and accepting rent from an illegal business increases landlord liability.
Sign up to Report Rent Payments to a credit bureau through TVS. This process provides an incentive to tenants wishing to build credit as well as those wishing to protect their good credit. Tenants will make paying rent on time a priority regardless of their source of income.
This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).
Click Here to Receive Landlord Credit Reports.
Disclaimer: The information provided in this post is not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.